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UK Treasury Chief Sees Economic Rebound

Britain's economy will shrink by 3.5 percent in 2009 but will begin returning to growth by the end of the year, Treasury chief Alistair Darling said.

LONDON (AP) -- Britain's economy will shrink by 3.5 percent in 2009 year but will begin returning to growth by the end of the year, Treasury chief Alistair Darling said Wednesday as he presented the government's new budget.

The revised GDP forecast was a sharp revision from the government's prediction in November of a drop of no more than 1.25 percent.

For 2010 and 2011, Darling predicted a recovery, with growth of 1.25 percent and 3.5 percent -- although his forecasts are more optimistic than those of most independent economists.

The nation's budget deficit will nearly double this year to 175 billion pounds ($256 billion), 12.4 percent of GDP, Darling said, and a series of further large deficits would boost the national debt from the current 50.9 percent of GDP to 79 percent by 2013-14.

"Because of our underlying strength, the measures we are taking, domestically and internationally, I expect to see growth resume towards the end of the year," Darling said.

Under pressure for Britain's depressed motor industry, he announced a scrappage program which would pay owners of cars over 10 years old up to 2,000 pounds ($2,900) toward the purchase of a new car. Only half of that incentive would come from government funds, the rest would come from manufacturers, the Treasury said.

The budget speech came on a day of more bad economic news, as Britain's unemployment rate rose to 6.7 percent and the government said it had borrowed 90 billion pounds in the last fiscal year, higher than recent forecasts.

Darling claimed that measures in the budget would cut the deficit by half within four years.

"At this stage, when there is so much uncertainty, to do so quicker would prevent us helping people now, choke off the recovery, and stop us investing for the future," Darling said.

Bigger deficits rather than cutting spending was "the right thing to do," Darling said.

"The alternative, to take money out of the economy now, as some have suggested, would damage key public services, create more unemployment, lengthen the downturn and lead, in the end, to higher, not lower debt," he said.

He said there would be no increase in income tax this year, but a new top rate of 50 percent on income above 150,000 pounds would be imposed next year, he said. The top rate now is 40 percent.

Darling also confirmed that the traditional "sin taxes" on tobacco and alcohol would rise by 2 percent immediately, and the fuel duty would also go up by 2 pence per liter in September.

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